March 9, 2016

# When a Penalty Is Not a Penalty

### Summary:

The ACA creates a penalty for not purchasing health insurance -- but do the math. It's not really a penalty.

Photo Courtesy of Sunshinecity

The Affordable Care Act requires most Americans to buy qualifying health insurance coverage. Fail to comply with this mandate, and there’s a financial penalty waiting for you come tax time. But when is a penalty not a penalty? When is a mandate not a mandate? Hey, kids, let’s do some math.

The penalty for going uninsured in 2016 is \$695 per adult and \$347.50 per child, up to a maximum of \$2,085 or 2.5% of household income, whichever is greater.

To determine the cost of coverage, we’ll use the second-lowest Silver plan available in a state. That’s the benchmark used to calculate ACA subsidies, and in 2015 Silver plans were roughly 68% of policies sold through an exchange. Even more important, I found a table showing the cost of the second-lowest cost Silver plan for 40-year-olds by state, but I couldn’t find a similar table for other levels.

The least our 40-year-old could spend on the second-lowest Silver plan this year is \$2,196, in New Mexico; the highest premium is \$8,628, in Alaska. The median is \$3,336. Divide the penalty by the premium, and you get 32% of the cheapest premium and 21% of the median premium. Put another way, paying the penalty saves our 40-year-old  consumer \$1,500 in New Mexico and more than \$2,600 in the mythical state of median.

I did find a table showing the national average premium a 21-year-old would pay for a Bronze plan: \$2,411.  In this situation, the \$695 penalty amounts to just 29% of the policy’s cost, a savings of more than \$1,700.

The purpose of this post is not to encourage people to go uninsured. I think that’s financially stupid given the cost of needing health insurance coverage and not having it. And, personally, I support the individual mandate. I also understand the political obstacles to establishing a real penalty for remaining uninsured.

However, I also believe the individual market in this country is in trouble. (More on this is a later post). Adverse selection is a contributing cause to this danger. The individual mandate is supposed to mitigate against adverse selection. The enforcement mechanism for that mandate, however, is a penalty that, for many people, is no penalty at all.

That’s not just my opinion. That’s the math.

Alan Katz speaks and writes nationally on healthcare reform, technology, sales and business planning. He is author of the award-winning Alan Katz Blog and of Trailblazed: Proven Paths to Sales Success.

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